Summary
- General Dynamics is undervalued based on three valuation models.
- The stock is one of the higher-yielding defense stocks, and it is trading at one of the lowest valuations.
- Business jet demand was negatively impacted by the COVID-19 pandemic. Demand is forecast to recover to pre-pandemic levels by mid-2021.
- General Dynamics has a large backlog for nuclear submarines that will drive top- and bottom-line growth.
General Dynamics Corporation (NYSE:GD) remains one of my favorite dividend growth stocks. The company is also the only defense contractor that is a Dividend Aristocrat. It also happens to be one of two undervalued prime defense contractors at the moment. However, I am largely bearish on Huntington Ingalls Industries (NYSE:HII) due to poor operational execution and low margins. That leaves General Dynamics, which I think is undervalued and is a great deal at sub-$140 and a good buy at sub-$150. The company does face some headwinds from its business jet segment, but I think demand will recover as the economy recovers. The defense segments are performing decently, and the backlog for nuclear submarines is robust. As one of the higher-yielding defense contractors (over 3%), 25+ years of annual dividend growth, and a low valuation, I view General Dynamics as a buy.
Source: General Dynamics
Overview of General Dynamics
General Dynamics is a diversified aerospace and defense company that traces its founding to 1899. The company operates through five segments: Aerospace, Combat Systems, Information Technology, Mission Systems, and Marine Systems. On the defense side, the company is the market leader in land combat systems. General Dynamics makes the well-known M1-series of tanks and the Stryker vehicle. General Dynamics is also one of two manufacturers of nuclear submarines including the Virginia-class and the Columbia-class submarines. The company also makes surface combatant and support ships, oil tankers, and cargo ships. Other defense businesses include munitions, armaments, weapons systems, cyber, cloud, data analytics, electronic systems, repair and modernization services, etc. The commercial side is primarily manufacturing and selling Gulfstream business jets. General Dynamics is the market leader in long-range business jets with about 50% market share. Total revenue was $39,350 million in 2019.
